Article on Section 138 of Negotiable Instrument Act: Security Cheque

It’s Chequemate, or Should Be for financial institutions and money lenders.

V

ery often financial institutions, money lenders, business establishment demand blank post-dated cheques from the borrower as a security for repayment of loan. The question is, whether prosecution can be initiated against the drawers in case of dishonour of cheque given as a security under section 138 of Negotiable Act?

“It is doubtful if provisions of Section 138 of the Negotiable Instruments Act would be attracted to a case in which a blank or post dated cheque is obtained by a bank or money lender before or while sanctioning or disbursing loan amount as security for the loan”, observed Hon’ble Bombay High Court in Rajendra Warma v. Ramkrishna Urban Cooperative Credit Society Case while holding that banks cannot prosecute borrowers if the blank post dated cheque issued by them (Borrowers) as collateral security is dishonoured, sending a sense of disappointment across commercial and business circle.

Though the Law is very much clear on the aspect that, if anyone draws a cheque on an account maintained by him with a banker to pay someone else money, and the cheque bounces, that person is guilty of having committed an offence under the Negotiable Instrument Act, provided certain conditions as envisaged under the provision of the Act are met. Conversely it is uncertain if the provisions of section 138 of the Negotiable Instrument Act can apply to a case in which a blank or posted cheque is obtained by a bank or money lender before or while sanctioning or disbursing loan amount as security for the loan.

The Andhra Pradesh High Court, in Taher N. Khambati v. Vinayak Enterprises & Ors1., while holding the cheques should have been voluntarily issued for discharge of a debt or legal liability as envisaged u/s. 138 observed: “…..Section 138 of the Act is introduced with a view to avoid the malignant trade practices of indiscriminately issuing cheques without funds. The amendment is introduced with a view to curb instances of issuing such cheques indiscriminately. So, having regard to the purpose with which this provision is introduced, it is doubtful whether a case of this nature can be construed as attracting the provisions of Section 138 of the act”.

However one may unremittingly refer to ICDS ltd. v. Beema Shabeer’s case2. In the decision of the Apex Court in this case the cheque given by a guarantor when bounced was found to be within the fold of Section 138 of the N.I. Act. whatever reason if a cheque is drawn on an account maintained by him with a banker in favour of another person for the discharge of any debt or other liability, leave no manner of doubt that for whatever reason it may be, the liability under this provision cannot be avoided in the event the same stands returned by the banker unpaid. The Legislature has been careful enough to record not only discharge in whole or in part of any debt but the same includes other liability as well”. This was a case dealt with in respect of cheque issued by the guarantor towards part payment in respect of hire purchase facility given to principle debtor

The above case often reverberate in the court room in support of the stand that the cheque issued as security were also covered under section 138 of Negotiable Instrument Act.

In my humble view, in the decision cited above, the Hon’ble Supreme Court was only clarifying the significance of the word “any cheque” and ‘other liabilities’, in the relevant context to clarify the legislative intent that when a cheque has been issued by whosoever for discharge of whatsoever liability and such a cheque if dishonoured for prescribed reasons, section 138 of Negotiable Instrument Act is attracted. In the said judgement Apex Court had not discussed the issue of ‘Security Cheque’, in detail but has kept the issue within the realm of relevancy.

Before we advert further, it would be best to seek light from the language applied in the section and examine the ambit of the expression.

In the case of Greater Bombay Coop. Bank Ltd. v. United Yarn Tex (P) Ltd. & Ors3., Hon’ble Supreme Court took the view that , “the elementary rule of interpretation of statute is that the words used must be given their plain grammatical meaning, therefore, the Court cannot add something which the legislature has not provided for”. In this background let us examine the provision of section 138 of NI Act and examine the key operating words in their ordinary parlance to comprehend the intention of legislature.

Relevant part of Section 138 of the N.I. Act reads as under :- 138. Dishonour of cheque for insufficiency, etc., of funds in the account Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from the account by an agreement made with the bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for [a term which may be extended to two years], or with fine which may extend to twice the amount of the cheque, or with both : (a) (b) (c) Explanation.- For the purposes of this section, debt or other liability means a legally enforceable debt or liability.

We may notice some of the general expressions used by the framers of law in this provision: ‘Any Debt’, ‘Other Liability’ and ‘Discharge’ are of extreme significance which stands as clarifying the legislative intent.

The expression ‘Debt’, in common parlance means, “an amount of money due and payable”, or“something thing owned whether money, goods, or services”.

In the case of Union of India v. Raman Iron Foundry4, the Hon’ble Supreme Court quoted as under:

"The classical definition of `debt', is to be found in Webb v. Stenton where Lindley, L.J. said: "... a debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation". There must be debitum in praesenti; solvendum may be in praesenti or in future - that is immaterial. There must be an existing obligation (emphasized) to pay a sum of money now or in future." So it follows that, “any Debt” would means a fixed and certain obligation to pay money or some other valuable thing or things, either in the present or in the future. In a still more general sense, that which is due from one person to another, whether money, goods, or services

Standing alone, the word “Liability” means an obligation, responsibility, or debt. The expression, `Other Liability' shows that the framers do not wish to restrict the same to the relationship of a creditor or debtor alone.

On cumulative reading of the provision, “for discharge of any debt or other liability”, should be interpreted to mean current and existing liability or past ascertained liabilities. “A cheque issued in respect of uncertain future liabilities would not attract prosecution under section 138 of the Act. What follows there from is that any cheque issued in respect for future liabilities not in determined as on date of cheque would not attract prosecution u/s 138 of the Negotiable Instrument Act”, observed Karnataka High Court5. The Madras High Court in M/s Balaji Seafoods Exports (India) Ltd. And another v. Mac Industries Ltd6.,held that on the date when a blank cheque has been issued by a drawer there should be a subsisting debt or liability between the parties. Similarly the Gujarat High Court and Kerala High Court are of the view that the provision of section 138 are not applicable on dishonour of ‘post dated cheque issued as collateral security for due performance of the contract by which the drawer bound themselves to repay the amount, as the cheques were not issued to discharge any existing debt, as the liability which was to be discharged within the meaning of section 138 of the negotiable Instrument Act was still to arise.

Section 138 intended to punish only those who knowing full well that they have no amount in the bank and yet issue any cheque in discharge of the debt or liability already borrowed or incurred, which amount to cheating7. Section 138 draws presumption that one commits the offence if he issues the cheque dishonestly for defrauding the creditors and stalling the payments.The Act was intended to give more credibility to cheque as a financial instrument; "however, the object was not to provide effective and speedy remedy for recovery of loans”. And not to punish those who could not discharge the debts borrowed, the liability incurred on account of financial stringency. The Law makers must not have intended or imagined that money lenders or banks would obtain blank or post dated cheques while sanctioning/disbursing loans as securities and would use them to make debtors/borrowers to repay loan under threat of prosecution and punishment under Section 138 of the Negotiable Instruments Act. Moreover section 138 is a penal offence and criminal prosecution is neither for recovery of money nor for enforcement of any security. The person ‘victimised’ by the dishonour can always file a civil suit against the drawer of the cheque for the recovery of the amount.

So, having regard to the purpose with which this provision is introduced, subject to presumption and proof that may be given by either party in support of their case, if it is proved that the cheque was given as security, then section 138 would not be applicable. Apex court in M/s. Narayana Menon Vs. State of Kerala8., observed that if defence is acceptable as a probable the cheque therefore cannot be held to have been issued in discharge of the debt, for example, if the cheques is issued for security or for any other purpose the same would not come within the purview of section 138 of the Act.

Conclusively, we can say that from the above the discussion, that if a cheque has been given as security, when liability is assessed and quantified, the person who had drawn the cheque cannot avoid criminal liability under S.138. It follows that If the cheque issued in respect of future liability not in existence as on date would not attract prosecution under section 138 of the Act.

I wish to seek certain clarifications on the issues highlighted hereunder Kindly help me out

I had issued a crossed cheque to my vendor for security purpose, the same PDC was issued towards the intending supply of goods favoring me as per my supply terms and conditions in my supply order

But the vendor did not supply me with the goods as per my requirement and had supplied defective batteries in violation of the terms and conditions in my supply order

I had clearly put seal on the cheque instrument as ISSUED FOR SECURITY PURPOSE ONLY NOT TO BE PRESENTED OR ENCASHED IN BANK on the post dated cheque

In spite of the above seal available on the instrument the vendor has presented to my banker and my banker had returned the same instrument as stopped by drawer. I had as abundant caution had also issued stop payment instructions to my banker

pls clarify whether the bank can accept the cheque though i had put the seal as ISSUED FOR SECURITY PURPOSE ONLY. NOT TO BE PRESENTED OR ENCASHED IN BANK in your banking terms in order to proceed further against my vendor

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Section 138 of the Negotiable Instruments Act, 1881 (henceforth referred as the Act) provides for conception of criminal proceedings against a person, whose cheque has been dishonoured, deeming it to be an act alike cheating. There is a plethora of judgements on the subject delivered by Supreme Court and various High Courts and is a growing apace and is a source of considerable perplexity, and we often find ourselves in a quandary.
An attempt has been made here to consolidate the latest judgements on the subject for ready reference.

I. INGREDIENTS AND REQUIREMENTS OF THE PENAL PROVISIONS:
In 'Harman Electronics (P) Ltd., V. National Panasonic India Ltd., (2008) 16 SCALE 317, the Court opined that the offence under Section 138 of the Act can be completed only with the concatenation of a number of acts, namely:
1. Drawing of the cheque;
2. Presentation of the cheque to the bank;
3. Returning of the cheque unpaid by the drawee bank;
4. Giving of notice in writing to the drawer of the…